Commentary on popular culture and society, from a (mostly) psychological perspective

Monday, April 20, 2009

Does anyone have a 12% good growth mutual fund?

I must say as I watch the stock market dive today, I am really glad I got out of mutual funds completely a little over a week ago. I was sick of the ups and downs in my portfolio and the lack of control I had over my financial future. I realize, given the current administration, that my control is still limited--at some point, we may be forced to turn our SEPs and IRAs over to the government. But until then, I like the feeling of being invested in CDs, bonds and cash. "Stupid move," some experts or others might say--but sometimes a feeling of control is more important than money.

I have started watching Dave Ramsey, author of The Total Money Makeover, at the suggestion of some readers and he has some good general advice. However, I have to ask, "where are all those 12% good growth mutual funds that Ramsey is always harping about?" I have invested in numerous mutual funds but never gotten returns like that. Last time I heard about anyone getting returns that good, they were victims of the Benie Madoff scandal. I have been in many mutual funds over time (some as long as 13 or more years) and never had returns this good that lasted. Has anyone out there? Is so, tell us about about it--no need to tell us the names or any details, just whether you have made a killing in any "good growth mutual funds." Maybe my picks are just poor.

42 Comments:

As a hard money lender, I put out investor money in high equity (yes they still exist) trust deeds on properties here in Southern California.

The minimum interest rate is 12%, you can usually get a point or up front when escrow closes and the loans pay off in 12 to 36 months. They are interest only, easy to service and if the borrower fails to pay, easy to foreclose on and sell (that's the high equity part).

Since what ittle we have left is what we have to live on for the rest of our lives, I'm trying to convince my wife that we should cash out as much as we can with out pushing the tax bracket, pay the taxes on it now, and stuff it in coffee cans.

I think (as do many other bears) that we are in a bear-market rally, which means absurd shifts up and down are the norm, not the exception. Even so, as of 1PM EDT, the DJIA is only down 3%; that's not that much of a correction.

I am personally waiting for Dow 9000 before I start a bear-market bet with inverse funds (i.e. they're going short on the market). I can see making 12% there for a short-term play, especially if the Dow retreats below the previous bottom.

There is no such thing as a sure, constant 12%. You can easily get 12% if you get ahead of a market trend, but you will bet wrong as much as right. Even the greats of the market can usually only get it right for 3-5 years, then they wear out and start aiming for "safe" 6-8% returns (if they're lucky).

12% means risk. Mortgages in this market are risk (you may have property post-foreclosure, but you wanted cash, not property). With Illustrious Leader dedicated to borrowing and spending, even the coffee can risks inflationary disasters. (The Zimbabwe dollar is now worth less than toilet paper, for example.)

High yields are of course associated with high risks. There's plenty of stuff out there that has a 10% or more yield, but you have to factor in the probabilities of defaults, dividend cuts, or other disasters.

One class of investments I like is "master limited partnerships." These typically operate some form of energy infrastructure, such as oil/gas pipelines or oil storage tanks. Many of them get paid by volume rather than by commodity price, so they are relatively insensitive to the price fluctuations. There are some tax benefits, but there is also considerable tax complexity tax complexity, since you have to file a K-1 form for each MLP and deal with calculations like return of capital.

One example of an MLP is Boardwalk Pipeline (BWP), a gas pipeline operator currently yielding 8.6%. Another is TransMontaigne (TLP), an interesting little ($230MM market cap) operator of oil storage facilities and various other things. Current yield is 12.4%.

The businesses can be complex in financial and structural terms, despite the apparent simplicity of their operations, so they need to be carefully researched.

DOW 9000? Seriously? If it hits that, it will be a resistance point. I suppose it could break through but any rally we have right now is very short term. I'm looking for a DOW 6000 by year end and 4000 in the first quarter next year.

I agree with the coffee can disasters though. With so much being pumped in to the money supply it's tough to hedge against inflation right now.

When you buy trust deeds, you do it in areas that still have very active sales markets so that if you do have to take back a property, you're not sitting on it for a year before you can get rid of it. Orange County, CA, Los Angeles, etc. Major markets. Not small towns in Kansas, etc.

Well, you can see what the yields of various funds are. Of course, right now we are still trying to recover from a deep recession. But, if you look out on Vanguard at funds that go way back, even in this recession, they have yields close to 10%. (The number is maybe 10% as opposed to 12%, btw.) The point just is that you really did get a high yield if you invested for that long. (Yes, 50-60 years in some cases, but that number will come down eventually after we completely recover and go back to growing for a while. And there are a number of pretty decent vanilla growth-type funds that still have high inception to date yields that were starded 25 years ago. I guess, it is the fear that Obama is the apocalypse and that we will never recover that is the real thing going on here.)

I will also say that the funds in question grew at around 10% only because no one was taking money out during recessions and trying to otherwise time the market like that. So, you most certainly will not get that yield by becoming faint of heart and failing to do the very same thing you do during good times during the bad times. I have not changed one thing about my 401k through all of this because it is absolutely critical to continue to invest during the bear market in order to realize the long run returns. I'm also aggressive and somewhat fearless. That's the only way you get the high returns. You don't get it for free. You must invest your money for the long term (e.g. 20 years) and you can't chicken out and take it back in the middle. If that's how you want to do it, then you're looking at 7% instead of 10%.

At any rate, there are some funds that had some high yields. You would have gotten a 12.23% return on the Vanguard PRIMECAP fund had you put all your money there back in 1984 and left it there. You would have gotten 9.36% return if you put it in their small-cap index fund back in 1960 and left it there. If you invested in Energy or Healthcare back in 1984, you would have gotten crazy high returns (like 16%).

Look, more realistically, just do something like their windsor or their windsor ii both of which have a close to 10% inception to date yield even now. And, I think both of those are pretty standard types of growth funds. The windsor ii was started in 1985 -- a mere 25 years ago. What you do is you put in a steady stream of money into it every month or every pay check or something like that. You put in the same amount all the time and you don't stop putting it in when the market tanks and start putting it in when the market shoots up. You don't increase your investment just because the market is taking off and you're "into" your 401k now. You just put in the same amount all the time, and you will get these returns. These returns will prbably even increase slightly as we recover. You do this for some length of time until you are about 15-20 years out from retirement (so like when you turn 45-50, say). Then, you wait for a point at which your own personal ytd yield is >10%, say, or 9% or whatever. If you set that number well (slightly conservatively), then there is a near 100% chance that will happen at some point in the next 20 years before you retire. The minute it does, you must have the discipline to move a big chunk of it into fixed income investments (or all of it into a "balanced fund" instead of an "aggressive growth" fund). Then, when you get right up on your retirement, like 5 years out or so, you do another move to a substantially higher percentage of cash equivalent investments than even in a balanced fund. This is the conventional wisdom on the matter, and really even in this brutal recession, it doesn't look like anything has changed.

However, if you take your money out of the aggressive growth fund in a bear market and stick it in cash equivalents like CDs only to turn around and stick it back in domestic equities again when the market recovers, then all you are doing there is buying high and selling low. You have to pay the casino, Helen. The price you pay for 10% returns is watching your fund tank during a bear market and still putting money in it like nothing is happening. That's what I'm doing. In fact, the longer the market stays down, the more money I will make is almost exactly how I look at it. Then again, I do have 30 years to recover from this and not too terribly much invested in it, anyway....

I meant to say that you wait until your inception to date (not year to date) yield exceeds something like 10%. You really probably do want to set this so that the probability is like 99.9999% that it will happen, again, at some point. And then, you wait for it to happen, and react to that even properly. So, maybe set it at 9%. If you do it with safer investments, that number gets a lot lower. So, it is true that the yields you can count on probably are lower than advertised.

Thanks for the advice--the thing is, I have put my money in the same mutual funds and left it there for years, it still sucks. In the good times, it was never returning much either and this includes some Vanguard funds I had. I also had family members that had money in mutual funds and twenty years later, the return is no better that 5% or 6%, so I say, what's the point?

I always hear about the great returns if you put your money in the right fund at the exact right time. But that is hard to do, kind of like winning the lottery if you know the winning numbers ahead of time.

A fund which might be worth looking at is John Hussman's Strategic Return Fund. I'm not an investor in this fund, being more of a direct investor in securities and other things, but I follow Dr Hussman's writing on the markets and I like his insights and his cautious style. His website is here:

In April 2007 I pulled most of my money out of the stock market and put it into a taxable money market fund. I've paid taxes on the interest since them, and I'm not getting rich off the interest, but the money is still there at least. The stock market is going to drag for the near future (my prediction), act wisely.

I am with Cham - interest, taxes on the interest, but always, at the end of every year, there is more money in the account than there was at the beginning.

After taking a beating in the high tech melt down, then losing my high tech job, I realized I would never see that money again, and with no income, never have a chance to earn any, either. So some growth is better than none.

Why not just put the higher-risk/higher-return chunk of money in an S&P index fund. That beats something like 2/3 of the managed funds (or more) and the fees are very low because it's an automatic fund, not a managed fund.

The dirty secret is that most mutual fund managers cannot even beat a simple indexed fund. A further dirty secret is that even the brightest of the bright can't seem to do what they brag about (Long Term Capital Management, for example, went bankrupt with huge sudden losses; that was supposedly the brightest of the bright).

The few money managers who can consistently beat an indexed fund seem to fall on the side of the Graham / Dodd value investing strategy (the strategy outlined in various incarnations of the book "Security Analysis" by the two authors named above). In some years, a "momentum" strategy also works.

Warren Buffet is an example of an investor who uses the Graham / Dodd investment method. I don't know if I would buy his fund (Berkshire Hathaway) at this point, because he is going to kick the bucket sooner or later. But he's had a very good run over the decades.

I know that Clinton presided over an exploding bubble (it looked good while it was getting artificially pumped up - it is also characteristic of bubbles that they accelerate near the end), but there were other times under democrats, like Jimmy Carter, that weren't so great.

The clearest example of that was the end of Jimmy Carter's time. Jimmy didn't have a clue as to how to fix the double-digit unemployment, double-digit inflation and sad performance in the stock market.

Ronald Reagan and Paul Volker (the Fed guy at the time) first pushed interest rates way up to cure the inflation (temporarily causing more unemployment) and then dropped rates way down (which cured the unemployment).

It took a couple of years for the full effect, though, and the great bull market started in mid-1982. After that, there was a long period of low inflation, low interest rates and good employment figures.

Actually, it is divided government that is best for the market. From the WSJ:

When Republicans have controlled the whole government, it blows away anything Democrats can do. Stocks have averaged 17.5% and real GDP growth 3.3%.

By the way, as fond as Democrats are of saying how poorly stocks have performed under George W. Bush, here's a sobering fact: Stocks averaged 14.1% return in those Bush years when Republicans controlled Congress -- and when Democrats got in there and mucked things up, the average has been a loss of 8.9%. That's not even including 2008 year-to-date, which doesn't look so pretty.

If the electorate were really smart, it would elect a Democratic president and a Republican Congress. Under that deal, stocks have averaged a 20.2% total return.

I just ran some numbers on the VFINX (that vanguard index fund JG spoke which is also my own first pick of funds). The median 10 year return since 1987 (as far back as my data went) is indeed 12%. Also, had you been 30, say, working for a corporation somewhere with a 401k in 1987 and you went ahead and just dumped your 401k into it only to make it to the ripe old age of 52 to watch the market absolutely tank like it has, you still would make a better than 10% yield over the life of your account. (And, that is with a 5% annual salary increase assumption which empasizes the current bear market more.)

So, there you go. This is a real fund. And, there is no management to it. It just follows the S&P (which keeps expenses charged to the fund low). There have definitely been periods where the yield was over 20% for that fund. 10% is plenty conservative. You can practically cashout at any time and still make over 10% if you have been in it long enough.

I don't know what funds you were invested in, Helen, but I would wager they were either new and unproven or not growth funds or both of the above. Did they have a 25+ year history in which their inception-to-date yield was over 10%?

There are better funds (like Berkshire Hathaway - hands down), but they rely too much on the specific person. Warren Buffet is just getting too old for me. There are also strategic trading models floating around that have incredible returns - up to now - mathematically, but I don't know what to make of it. Probably the same thing as LTCM (really good until it's really bad).

I would say: Plunk your money down in some index fund - knowing that it will probably go down at first because you can't pick an absolute bottom. So what. If it's long-term money (and it SHOULD BE in a risky fund), it will eventually go up.

I would say: Plunk your money down in some index fund - knowing that it will probably go down at first because you can't pick an absolute bottom. So what. If it's long-term money (and it SHOULD BE in a risky fund), it will eventually go up."

...And if it doesn't, we're all screwed anyway and it doesn't matter what we do.

I'm all in favor of low-fee investing, but this is not the time to make a big (and passive) allocation to the US stock market. Remember that the stock market as a whole is a stand-in for the economy. Those historical returns and their underlying rates of growth are not likely to be repeated. Particularly with higher taxes around the corner. Think about citizens in the sclerotic European economies. They have been forced to look overseas for returns for decades. I figure now it's our turn to do the same.

My plan: I am contributing enough to my 401k to get the full employer match. I have had only small speculative US stock positions for ~year and a half. I have a small allocation to precious metals, and a decent position in inflation protected treasuries, as I expect those to have a nice rally once the thundering herd figures out that there will be nothing easy about quantitative easing. Everything else is going into cash equivalents held in non-retirement accounts. I figure that rates will only go up in the future; lock in that tax hit today.

I have read Dave Ramsey's book, and I listen to his radio show in the afternoons when I'm out driving around.

I like his idea of having $1000 cash hidden in a safe place, six months salary in a savings account, and having a disciplined budget that allows you to invest 15% of your income. But I was struck by his advice to only invest in good growth mutual funds. That may be sound advice--his rationale is that he has never known one to go bust (doesn't mean one won't though)--however, these funds are not FDIC insured, so there is a risk element involved. But the same can be said for stocks, bonds, pension plans, and yes 401Ks.

The two best books I could recommend are Benjamin Graham's The Intelligent Investor and Victor Canto's Cocktail Economics. The former is about value investing, and the latter is about understanding how external factors, for example changes in government policies and regulations, affect investment strategies.

The main thing to remember is that it's all about safety of principal and adequacy of return. I'd say that a modest 3-6% return is adequate if invested over the long term (at least 20 years). Some mutual funds boast of a 10-12% return, and there are some that can actually deliver it. But I've always been wary of claims like that, because they sound like scams to me.

I'll take safety of principal and 6% over danger to principal and the promise of 12% every day.

There is no get rich quick scheme. There is only wealth building, which comes through value investing. You have to do your research.

That said, if I were to offer someone investment advice, I would say buy stocks in pet food companies and ammo producers. There is no level of deprivation people will not endure to provide for their pets. Most people will buy ground meat for themselves so they can afford gourmet treats for their cat, so this to me seems like a recession proof investment. And as to ammo, well, you can never have enough of it, in good times or bad.

After skimming the comments, I felt compelled to reply. With respect, if someone tells you they can give a guaranteed 12%, walk the other way.

In efficient markets, meaning they are liquid (easy to get money in or out), transparent (accurate information is easily obtainable), and large (many transactions per day), it is very, very difficult to exceed the risk-adjusted rate-of-return. In other words, if you want a higher return, you must assume higher risk.

The academic term for this is capital asset pricing model, or CAPM. A quick search of finance journals will yield as much information as you want, but I can illustrate the basic principle with a simple thought experiment. Suppose I have a great business idea that is guaranteed to make 12%/year. Why would I borrow from a lender that wants 12% interest? I would go to a bank that wants much less, and keep the difference for myself. The ONLY REASON a business gives a higher rate-of-return to investors is because it was unable to attract investors at a lower rate-of-return. This is due to risk.

This isn't to say that 12% return is impossible, it's just impossible to get risk-free. For example, buying distressed mortgages. On paper, it might be a 12% guaranteed return. But the value of the house might drop further, the house itself could be in poor condition, and there might be outstanding tax obligations on the house.

Another example. There are a lot of mutual funds that have great historic records, funds that have gotten lucky and made good bets. The problem is, all the funds that were unlucky don't exist anymore. There is a positive selection bias. How do you know that your fund led by a truly gifted manager, rather than just the lucky survivor? Another experiment - go to the library and dig up a 1990 issue of Forbes and find out what the top performers of that year were. See where they are now.

You get the point - risk and return always go together. Decide how much risk you can handle (financially and psychologically), and go from there.

2 Comments actually, The first is what I originally came to your blog for. 1. The Tea Party MUST morph into something that changes the debate from simply being overtaxed, (yes I know the tea party is much more than that). The administration easily turned the focus to taxes only and is effectively negating our message thru obfuscation, by harping on the tax cuts and 100 BIL in reduction of the budget (yea right)..We need to organize not tea parties now but “Who is John Gault” parties!

2. While I was here I read your lament over poor performance of your overall portfolio.. Sorry to hear that, but you have options, which as an independent financial advisor, I could help you explore, by and hold will kill your acounts over the next 14 years... if interested please feel free to contact me ... aircav@bellsouth.net

There is always some pain during a downturn. And this is the worst one in my lifetime. I am invested mainly in 4 and 5 star Fidelity funds. Puritan is a growth and income fund. No, you are not going to get 12% returns. On the other hand, slow and steady will "get you there". And, you really should be somewhat diversified and be invested in several funds. Also, with the amount of money our government is printing, you may wish to have some money (5%) invested in gold (GLD, an ETF) in case inflation "takes off". This should be be held in an IRA, 401k etc.

"Be fearful when others are greedy and greedy when others are fearful." This might not be the best time to get out.

No guarantees, of course. Even if you're prudent and do everything "right", extreme events might wipe you out. That's just the way it is. (Damn, it hurts to type that! I am in significant trouble because of decisions that were prudent risks a couple of years ago.)

1. Dollar cost average. It took 25 years for the Dow to return to its 1929 peak. Iirc (from "The Intelligent Investor" by Warren Buffett's mentor Ben Graham), someone who started dollar-cost-averaging at the 1929 top would have been compounding at 8% during those 25 years. But validate this for yourself.

2. Diversify as best you can: across national boundaries, asset classes, company size, trading strategies, etc. Investments that that looked diversified during normal times may act less diversified during major downturns. Diversify anyway. You've probably been exposed to enough basic statistics to understand the rationale.

3. Think in terms of years and decades, not weeks or months. Maintain perspective about anecdotes about killing in the latest hot area: people who brag about successes tend to keep mum about failures.

The ridiculousness of going BACKWARDS in time to show the excellence of VFINX, e.g. is that guess what!!??! WE can't go backwards to start investing!

yes, mutual funds did that well once. Index funds tracking the big indices like the S&P 500 once made 10-12 % a year for a few years, because you happened not to be in a bear market during those times.

And we just had a 20 year bull market.

And now we don't. Who knows if we ever will again.

Should we have made 12% a year on the indices up until 2008? well, maybe. I did great in the 90s too, having some occasions when I was making 6-8% a quarter on my Vanguard funds.

But Dave Ramsey and the rest are wrong. It's over. we aren't going to have 12% growth in index funds in the next decade. And all of that crap advice about how "you'd make money if you left your money in the market for more than 19 years" is because the last bear lasted for 18 years---and the market didn't reach past its old peak for 18 YEARS. So cumulatively, you had lost money if you'd been in at the peak for the next 18 years, and didn't break back to "even" of that peak.

So you'd have been better off doing ANYTHING else wit your money for those 19 years, basically--though occasionally, yes, you can make money in a bear market rally, if you are sophisticated. But to suggest to people to "leave their money in the market" to lose value for 19 years when instead they could perhaps do something else with it is asinine..

Of course, the hard part is knowing when the bear market will end. But honestly? We can guess that a president and congress who stop the massive deficits and regain fiscal responsibility might be a reason to believe the bulls could come back. Not rocket science to think there's no bull market until then.

Ramsey, Orman, and the rest are living in fantasyland. We can't pretend our index funds are going to earn that much for another generation. Time to get over it. We aren't going to retire in our 60s.